We recently blogged about an action commenced by Winston Laboratories, Inc. (“Winston”) against FDA, which denied a small business waiver for a new drug application (“NDA”) user fee under the Prescription Drug User Fee Act. SeeWinston Labs, Inc. v. Sebelius, No. 1-09-cv-04572 (N.D. Ill. 2009). On October 1, 2009, FDA filed a motion to dismiss Winston’s law suit on the basis that FDA’s decision is consistent with the plain language of the statute (Chevron step one) and, even if the language of the statute is ambiguous, FDA’s decision should be afforded deference since it is based on a permissible interpretation of the statute (Chevron step two). On December 11, 2009, the U.S. District Court for the Northern District of Illinois denied FDA’s motion to dismiss under step one of the Chevron standard for agency interpretation.

Pursuant to the FDC Act, FDA will grant a waiver or reduction of user fees where “the applicant involved is a small business submitting its first human drug application to [FDA] for review.” FDC Act § 736(d)(1)(D). The FDC Act specifies that FDA will waive “the application fee for the first human drug application that a small business or its affiliate submits to [FDA] for review.” FDC Act § 736(d)(4)(B) (emphasis added). A “small business” means “an entity that has fewer than 500 employees, including employees of affiliates, and that does not have a drug product that has been approved under a human drug application and introduced or delivered for introduction into interstate commerce.” FDC Act § 736(d)(4)(A). The term “affiliate” means “a business entity that has a relationship with a second business entity if, directly or indirectly – (A) one business entity controls, or has the power to control, the other business entity; or (B) a third party controls, or has power to control, both of the business entities.” FDC Act § 735(11) (emphasis added).

A brief description of the relevant facts: The case hinges on Winston’s historical relationship with a defunct pharmaceutical company . Specifically, Dr. Joel Bernstein and his immediate family members own approximately 60 percent of Winston. Dr. Bernstein was President and owned a majority of shares of Northbrook Testing Co., Inc. (“Northbrook”), which had submitted an NDA prior to its dissolution in 1984. According to Winston, since Winston and Northbrook were not in existence at the same time, at no time did Winston control or have the power to control Northbrook or did a third party control or have the power to control both Winston and Northbrook. However, FDA concluded that because Dr. Bernstein had controlled Northbrook prior to its dissolution in 1984, which was 14 years prior to the incorporation of Winston in 1998, Northbrook was considered an “affiliate” of Winston. Since Northbrook had submitted an NDA prior to Winston’s NDA submission and application fee waiver request for Civanex® cream, FDA denied Winston’s request for a waiver. (Dr. Bernstein was also a minority shareholder and Chairman and CEO of GenDerm Corporation, which merged into Medicis Pharmaceutical Corporation; however, on appeal within the Agency, FDA concluded that there was insufficient evidence to determine whether GenDerm and Winston were affiliates. Accordingly, the instant litigation turns on Winston’s purported affiliation with Northbrook.)

The district court analyzed FDA’s motion to dismiss under the Chevron standard of agency interpretation. Under step one of Chevron, a court must evaluate the plain language of the statute. If the language is clear, then the court and the agency must adhere to the plain language of the statute. If the language is ambiguous, then courts must apply step two of Chevron, under which a court must determine if the agency’s interpretation is a permissible construction of the statutory language. Generally, an agency’s interpretation of a statute under Chevron step two is afforded great deference by the courts.

In this case, the district court determined that, under Chevron step one, FDA has not established that Winston cannot succeed on its claims. In doing so, the court rejected FDA’s argument that because Dr. Bernstein had controlled Northbrook at some point in the past, Northbrook was considered an “affiliate” of Winston. Persuaded by the “clear” language of the definition of “affiliate,” the district court agreed with Winston that the relevant terms – “has” and “controls” – contained in the definition of “affiliate” indicated a requirement for “present control or present power to control.” Dr. Bernstein’s historical relationship with Northbrook, according to the court, should not affect Winston’s waiver request. Additionally, FDA presented no evidence to convince the court that it should support the Agency’s claim that applying the present-tense definition of the term “affiliate” is contrary to congressional intent. Because the court ruled against FDA on Chevron step one, the court did not need to analyze Chevron step two and whether FDA’s decision was based on a permissible interpretation of the statute.

While this decision is certainly good news for Winston, the case is not over yet. We expect Winston may try to position the case for an early summary judgment motion. Winston may also seek some targeted discovery to solidify the summary judgment record. It seems less likely – but nevertheless possible – that FDA may seek discovery from Winston or third parties to elicit evidence that would fit within the court’s interpretation of “affiliate.”